The present invention relates to data processing systems for assisting in financial transactions. More particularly, the present invention relates to a data processing apparatus and method for the managed trading of select classes of securities or other commodities in accordance with specific protocols in an auction format with controlled sequence of auction events. The inventive system is presented in the context of selected fixed income auction protocols for fairly and quickly transacting offer-bid trading.
Economic activity has at its centerpiece the buyer-seller transaction for all goods and services produced and consumed in a market economy. It is the fundamental mechanism to which resources are allocated to producers and output to consumers. The operation of the buyer-seller mechanism can and often is a critical determination of economic efficiency and when operated properly, will substantially enhance market performance.
Through history, there have been many different approaches adopted to bringing buyers and sellers together, each with the key objective of permitting transactions at or as close as possible to the xe2x80x9cmarketxe2x80x9d price of the goods satisfying. By definition, the market price is the price (in given currency terms) that a fully educated market, given full access will transact select goods. Discovery of the market price can only be accomplished by permitting full access to the transaction by essentially all potential buyers and sellers and allowing expression of each party""s desires. However, the buyer-seller transaction must be structured to operate at very low costsxe2x80x94or it will distort the market price of goods with artificially high transaction costs. Thus, the two keys to effective buyer/seller transactionsxe2x80x94full access of expression and knowledge coupled with low transaction costsxe2x80x94can be and are often conflicting, necessitating trade-offs between trading efficiency and market knowledge.
One well-known and particularly successful trading system is known as the xe2x80x9copen outcry auctionxe2x80x9d. This involves a process wherein buyers and sellers collect in one location and prices for select goods are presented to the group through a broker, via simple vocal offerings. This approach has been used for almost all to kinds of goods, but is particularly useful where there are no established trading locations or markets for the selected items. It is the dominate trading forum for exotic items such as rare pieces of art and the like. Although successful in bringing interested parties to the transaction, the overall process can be very expensive, adding significantly to the market-distorting transaction costs.
Open outcry auction techniques, modified over time, have also found successful application in many trading activities, including the buying and selling of farm produce and livestock, commodities contracts, futures contracts on a variety of items andxe2x80x94particularly germane to the preferred embodiment of the present inventionxe2x80x94fixed income securities. These trading activities focus on the buying and selling of essentially fungible items, that is, items that are without meaningful differentiation from like items on the market. For example, a bushel of wheat for February delivery is considered for sale and delivery at a price independent of its source. Similarly, a 30-year U.S. Treasury bond paying a coupon rate of 8 percent and having a July 1996 issue date is indistinguishable from other 30-year treasuries having the same properties. Accordingly, the price buyers are willing to pay and sellers are willing to accept defines the market price of all 30-year treasury bonds of that same vintage, allowing a source transparent application of open outcry auction trading.
The fixed income securities issued by the United States government are known as U.S. Treasuries. These instruments typically span maturities of 13 to 52 weeks (T-bills), one to ten years (notes), and up to 30 years (Bonds). T-Bills are pure discount securities having no coupons. Almost all other Treasuries having longer terms are coupon notes or bonds, with a defined interest payment cycle of semi-annual payments to the holder. An additional and more recent type of Treasury.
Treasuries have characteristic properties that make them especially useful for the purpose of the present invention and, therefore, are used exclusively in the following discussions with the fundamental tenant that the principles may be applied to other types of fixed income securities without departing from the inventive concepts. One important attribute of treasuries, in the context of the present invention, is the minimal and uniform default risk; the issuance of U.S. government paper removes the default risk as a defining criteria in the relative pricing of treasuries in the market place when they are backed by the full faith and credit of the U.S. government.
New Treasury securities are auctioned by the U.S. government at preestablished auction dates. The auction prices for newly issued Treasuries having a face value with a set coupon rate defines the Treasuries"" yields when issued. After the auction, the Treasuries enter the secondary market and are traded typically xe2x80x9cover the counter,xe2x80x9d i.e., without a defined exchange. As inflation expectations and supply and demand conditions change, the prices of recently auctioned Treasuries fluctuate on the secondary market. The new prices are reflected by competing bid and offer prices communicated among institutions, banks, brokers, and dealers in the secondary market. For example, the yield of a treasury note increases as its price drops in the market, typically reflecting an overall increase in the interest rates for that term of security.
The newly auctioned securities are traded with and in conjunction with the securities issued in earlier auctions. In this context, some securities are traded more often than others and are called the xe2x80x9cactivesxe2x80x9d; the actives usually correspond to the recently issued securities as opposed to the older securities in the market. Indeed, some older securities are infrequently traded, creating an illiquid market that may or may not reflect the current market-determined interest rate for that maturity length security.
Accordingly, the very size and diversity of the treasury market requires a high level of sophistication by market participants in the bidding, offering, buying, and selling transactions involving these securities. The very complexity associated with the transaction and the scale of trading undertaken by banks, brokers, dealers, and institutional participants necessitates a rigidly structured approach to trading.
In the past, open outcry auction bond brokering has served its customers well, providing highly efficient executions at near perfect market pricing. The open outcry auction applied to bond trading was implemented by a broker working with a collection of customers to create and manage a market. Typical customer representativesxe2x80x94both buyers and sellersxe2x80x94at a common location (e.g., a single room) where the representatives of the customers would communicate with each other to develop pricing and confirm transactions. This process employed the expression by the representatives of various bid and offer prices for the fixed income security at select volumes (i.e., how many million dollars of bonds at a given maturity). This expression would involve the loud oral xe2x80x9ccryxe2x80x9d of a customer-proposed bid or offer and the coordination with the fellow representatives regarding the extraction of complimentary positionsxe2x80x94until a transaction match is made and a deal is done. This xe2x80x9ctrade capturexe2x80x9d process relies on after-the-fact reporting of what just transpired through the oral outcry trade.
Recently, the trade capture process was performed by having designated clerks input data into electronic input devices. An input clerk would attempt to interpret the open outcry of many individual brokers simultaneously who sequentially are making verbally known their trading instructions of their customers. The quality of the data capture was a function of the interpretative skill of the input clerk, and the volume and the volatility of customer orders. A significant drawback to this type of auction data capture process is the difficulty in discerning the distinct trading instructions verbalized in rapid succession during a quickly moving market, so that an accurate sequence of data can be captured by brokers and a set of inputters.
The many permutations of this process will be discussed in detail below. At this juncture, suffice to say that, at lower volumes of transactions existing at the time of its development, and the lack of suitable alternatives, the open outcry auction process remained the dominant trading mechanism for decades. However successful, this approach was not perfect. Indeed, in recent years, some of the problems in an open outcry auction forum have been amplified by the vastly increased level of trading now undertaken in the fixed income field. Generally, difficulties would occur by the injection of trader personalities into the open outcry auction process. For example, a loud, highly vocal representative may in fact dominate tradingxe2x80x94and transaction flowxe2x80x94even though the representative may only represent a smaller and less critical collection of customers. Although such aggressive actions at open outcry auction may be beneficial to those particular customers in the short run, overall, such dominance of the trading can and will distort pricing away from the actual market conditions.
Other problems exist in open outcry auction that deplete efficient trading. The speed at which trading flows and the oral nature of the auction process injects a potential for human error that often translates into many millions of dollars committed to trades unrelated to customer objectives. As such, the broker is left at the end of each trading day with a reconciliation process that may, under certain market conditions, wipe out all associated profit from that day""s trading. Also, customers may quickly change direction regarding trading, based on new information available to the market. Shifting position or backing out of previously committed transactions on very short notice is often very difficult in the traditional open outcry auction process.
There have been many past efforts to incorporate computers into trading support for select applications and securities. Indeed, almost all trading today involves some computer support, from simple information delivery to sophisticated trading systems that automate transactions at select criteria. However, these systems have not significantly impacted the issues presented above as they relate to open outcry auction trading in the fixed income field. It was with this understanding of the problems with certain trading processes that formed the impetus for the present invention.
It is, therefore, an object of the present invention to provide a data processing system to implement a trading system capable of high volume trading activity.
It is another object of the present invention to provide a data processing method supporting a transaction enabling process for trading securities at accelerated levels with few errors and low costs.
It is yet another object of the present invention to provide a data processing system to support a formalized trading protocol governing the control of trading on a bid/offer market.
It is also an object of the present invention to provide a system for collecting, displaying and distributing in real time information on current market activity in fixed income securities and processing this information to quantify the extent of order and trading activity of customers in real time.
It is another object of the present invention to provide an apparatus for the select processing of several types of data wherein data is qualified prior to use, and for translating the qualified data into order and trading states for fixed income securities.
It is still another object of the present invention to provide a data processing system that provides controlled access to trading commands pursuant to preestablished trading criteria.
It is yet another object of this invention to provide a computer system that includes multiple workstations linked by high speed communication paths to permit rapid distribution and exchange of market data to participants.
It is still another object of the present invention to provide a system that rewards customers that create liquidity while insuring customer orders are satisfied in an orderly and equitable fashion.
It is yet another object of the present invention to provide a database system linked to the auction processor for collecting, filtering, and distributing select market data in near real time.
It is another object of the present invention to provide a computer system with a dedicated input system for a workstation, that is customized for the trading undertaken by that workstation and may be customized to the trading patterns and customers for a given broker at that workstation.
Yet another object of this invention is to provide timely order checkout.
Still another object of this invention is to provide customized trading tools particular to a given customer, such as stop limit orders, contingent orders, flags (warnings) to the broker that a particular customer has reached a trading limit (e.g., margin limit), and the like.
A further object of this invention is to utilize the present system for the trading of other financial products, such as futures, indices, and the like.
The above and other objects of the invention are provided by a computer-based, data processing system having program controlled logic for managing select trading. The data processing system employs a plurality of trading workstations linked with a server for coordinated data flow and processing. Communication is provided by a network, such as, for example, an Ethernet, token ring, token bus, or other hierarchical LAN and/or WAN configuration. The system preferably includes a dedicated keypad for input at each workstation that provides individually programmed keystroke commands; alternatively, other keyboards, keypads or voice controlled electronic devices can be used with the present system. Central processing logic dictates the available order, trading and allocation options, and screen displays for each workstation. As orders and transactions are entered, various protocols affect the allocation of bid-offer control, priority generation, exclusive trading time, and interactive trade management. As trades are completed, the system updates a linked database with newly entered transactional data.
In accordance with the present invention, the controlling logic provides a sequence of trading states for each participant. The five states are:
As various transactions are entered, workstations operate in one of these five states. The workstation xe2x80x9cstatexe2x80x9d determines the options available to that traderxe2x80x94and thus controls the flow of orders and trades in a cost-efficient and error-free manner. While participants may implement trading on similarly configured workstations, the protocols are universal for all traders, thereby precluding aggressive control of transactions without true capital commitment.
The foregoing features of the present invention may be more fully appreciated by review of specific illustrative examples thereof, presented hereinbelow in conjunction with a descriptive set of figures.